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Sunak government bets on tax cuts to revive UK election chances

By David Milliken, Kylie MacLellan and Elizabeth Piper

LONDON (Reuters) - Britain's Conservative government announced a 10-billion-pound ($13 billion) cut in labour taxes on Wednesday, paring emergency reserves to pay for it, in what could be the last budget ahead of an election it looks doomed to lose.

The budget fell short of the big give-away which the right wing of the party had been hoping for. Opposition Labour Party leader Keir Starmer nonetheless said the budget was the "desperate act of a party that has failed.

Finance Minister Jeremy Hunt cut the rate of social security contributions by two percentage points for the second time in just over three months, in a move worth several hundred pounds a year to some 27 million workers.

He also widened access to child benefit payments, froze fuel duties, extended relief on alcohol and support for low-income households in a total 13.9-billion-pound package designed to ease cost of living concerns that are high on voters' minds.

Prime Minister Rishi Sunak and his party trail Labour by around 20 percentage points ahead of a general election that must take place before the end of January but is widely expected in the second half of this year.

"Because of the progress we've made, because we are delivering the prime minister's economic priorities, we can now help families not just with temporary cost of living support but with permanent cuts in taxation," Hunt told parliament in a speech interrupted several times by opposition jeering.

The government's forecasters estimated he now had just under 9 billion pounds of "fiscal headroom" - the space available for future spending or tax cuts while meeting a goal of putting public debt on a downward path by the end of a five-year period.

The Office for Budget Responsibility (OBR) said the headroom represented only "a small fraction" compared with the risks that Britain's economy does not follow its central forecasts.

Paul Johnson, the head of the Institute for Fiscal Studies think tank, said Hunt's plans were dependent on borrowing forecasts that showed the budget deficit narrowing sharply.

"Take this with a pinch of salt. What we got again today was tax cuts today, paid for by some completely uncertain spending plans for the future," Johnson said on social media platform X.

Financial markets were little moved, in stark contrast to the bond market rout of September 2022 sparked by sweeping tax-cutting plans of Sunak's shortlived predecessor Liz Truss which had to be swiftly reversed.

Her demise saw Sunak become the fifth Conservative prime minister since the party won power 14 years ago.

"There was lots of low-level sensible stuff in today's budget but nothing to really move the needle either economically or politically," said Colin Asher, senior economist at Mizuho Bank in London.

Some lawmakers in the ruling party had been hoping for more relief, notably on the main rates of income tax, and called on Hunt to do more in coming months.

"The Chancellor ... will need to be bolder at the Autumn Statement which he will certainly be delivering," one said, referring to a possible final fiscal event before the election.

SLOW GROWTH AFTER RECESSION

To help make his sums add up, Hunt extended by one year a windfall levy on energy firms' profits, raised a tax on e-cigarettes and vapes and increased a duty on tobacco.

He also said non-economy flights would be hit with higher duty and said he would charge "non-domiciled" people living in Britain for more than four years tax on income from abroad - a measure similar to one already proposed by Labour.

Wednesday's changes would still leave the overall tax burden rising every year of the forecast period to hit 37.1% of output by 2028-29, which would be the highest level since 1948.

Hunt opted not to make savings by tightening the squeeze on future public spending. Many analysts said that already looked implausible and would hand a poisoned chalice to whoever wins the next election.

Several cities and towns have effectively gone bankrupt, the backlog of cases in courts hit a record high last August and a think tank found last year that performance in eight out of nine major public services had declined since 2010.

Hunt and Sunak have promised voters they will get the economy growing more quickly after a recession in the second half of last year.

The latest forecast is for the economy to grow by 0.8% this year, only slightly stronger than the 0.7% projected in the OBR's previous outlook in November. The OBR now projects output to expand by 1.9% in 2025 and by 2.0% in 2026, up from previous expectations for growth of 1.4% and 2.0% respectively.

Inflation, which this time last year was just above 10%, is now forecast to fall below 2% in the coming months, Hunt said.

(Additional reporting by Farouq Suleiman, Alistair Smout, Andrew MacAskill, Sarah Young, Sachin Ravikumar, Andy Bruce, Suban Abdulla, William James, Elizabeth Piper, Kate Holton, Paul Sandle; Writing by William Schomberg and Mark John; Editing by Catherine Evans, Alexandra Hudson)